After a slew of good earnings before the bell the markets shot higher like a Yellowstone geyser this morning. Normally we can get out of the way of market moves, but gap-ups are pretty tough to side-step, so we were stopped out of this week's SPX and RUT trades almost immediately.
To make that kind of a run the markets have broken several layers of important resistance, and some indices like the Nasdaq have broken all-time records. So with more major earnings on tap and other critical events this is an excellent time to look at…
The Markets and How They Affect Us
The SPX broke above its downtrend line yesterday–and gapped far higher again today…
As you can see the SPX gapped straight up to minor resistance at 2,388 in the first 30 minutes of trading and then closed at that same level six hours later. There was no material buying after the initial spike. The next resistance level is 2,395 then round number resistance at 2,400–but with enough good news we could make it.
The small cap Russell 2000 traded at a new high at 1,415 intraday but faded slightly at the close. If the Russell can hold these gains and move out to a new high range that would be very bullish for market sentiment. The Russell has outperformed the big caps for the last week.
The markets have gone from two-month lows on the Dow five days ago to new highs on the Nasdaq and within breathing distance of new highs on the Dow, SPX and Russell 2000. This has been an explosive reversal of fortunes and almost all of it was due to short squeezes on 3 of the last 4 days. Short squeezes are often impressive but they rarely lead to new sustained rallies–it actually takes some fundamentals for that to happen.
The two potentially huge upside drivers left in the tank this week outside of earnings are some kind of plausible tax reform and a debt ceiling concession or extension.
President Trump's tax package is due to be released tomorrow, but the fine print may be absent. Treasury Secretary Mnuchin said Monday that the plan will include tax cuts for “middle-income” Americans and will simplify the U.S. tax code. “The average American should be able to do his taxes on a large post card,” he also said. That would be a welcome relief if they can get it done.
It was also implied that the corporate tax rate and individual rates would be slashed–news that is buoying the markets as well.
However White House budget director Mick Mulvaney stated that a final plan likely wouldn’t be complete until June.
The debt ceiling however is another story. Even though Trump has been talking in a more concilitory fashion–particularly on the wall–there is still a lot of haggling ahead and not much time to do it. The government runs out of funding this Friday–just 3 days away.
The bottom line is we've got some powerful upside drivers immediately ahead including big tech earnings after the bell on Thursday. But there are also a few spoilers out there and this market may not be able to climb on massive short covering for a third day. It's time for the markets to settle a bit–and that would work well for our style of trading–the question is…
How do we make money on it?
For our aggressive trade we've got a condor on a stock sporting some tremendous premium right now that is due to diminish pretty quickly later this week–but the potential upside on this one is huge–72% in just 10 days.
And for our Roth trade we're selling a nice wide iron condor for a potential 17-day 28% profit.
We've got two trades looking good for this market–so let's get started…
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Keep up the good work,
Peter